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Last night Amy and I had an awesome dinner at Perla with Fred Wilson, Joanne Wilson, Matt Blumberg, and Mariquita Blumberg. Fred and I have been involved in Return Path for a dozen years and this has become an annual tradition for us when Amy and I are in NYC. At 12 years of service, Return Path gives a six week sabbatical and a pair of red Addidas sneakers as a “get ready for your sabbatical” gift. Fred and I got the sneakers, but not the six week sabbatical.
I sat across from Joanne and since the restaurant was noisy our table ended up having two separate conversations going. Joanne is awesome – if you don’t read her blog, you should start right now, especially if you are interested in NY entrepreneurship, women entrepreneurs, food, and the thoughts of an amazing woman. I still remember meeting her for the first time around 1995 and thinking how dynamite she was.
Oh – and if you are a seed stage company in NYC looking to raise money, you are an idiot if you don’t immediately reach out to Joanne and try to get her involved. She is one of the most thoughtful angel investors I’ve ever met.
We talked a lot about seed stage investing during our part of the conversation. Joanne has done about 25 investments in the past few years and has a very clear strategy for what she invests in. She works incredibly hard for the companies she invests in, is deeply passionate about the products and the entrepreneurs, and clearly loves what she does.
During the conversation we had a moment where we were talking about feedback. I told her about my approach of saying no in less than 60 seconds. She told me a story about giving entrepreneurs blunt feedback in the first meeting, which I always try to do also. And then she said something that stuck with me.
Joanne will often start a meeting by saying something like I give you permission to hate my feedback. You can decide that you want to tell me ‘fuck you’ after the meeting. But I’m going to tell you what my direct and honest reaction is.
Now Joanne is a New Yorker through and through. Aggressive, direct, and clear. But never hostile. Ever. And a deeply loyal supporter. So this feedback, while direct, is incredibly powerful. It’s often extremely hard for someone to hear, especially if they are in “I’m trying to convince you to fund my company mode.”
I play the same way. At Foundry Group, one of our deeply held beliefs is that we always be intellectually honest, no matter how difficult it may be. At TechStars we pride ourselves on providing direct feedback, but always saying “this is only data”, letting the entrepreneur make their own decision about what to do.
These are versions of Joanne’s permission to “hate her feedback.” It’s a powerful way to frame any discussion. And I know I’ll be using the phrase “I give you permission to hate my feedback” many times in the future.
We describe Foundry Group‘s behavior as “syndication agnostic.” When we make an investment, we are completely agnostic as to whether or not we have a co-investor. This is true at early stages but also true at later stages. We make our own decisions to invest, or not to invest, independent of what other investors are thinking. As part of this philosophy, we’ll lead follow-on rounds for companies we’ve already invested in, including those making great progress where we will lead an up round that we price. We aren’t looking for outside validation from other investors of any sort – either positive or negative. Because we are syndication agnostic, we are delighted to work with great co-investors and welcome and encourage the interaction and partnership. But we don’t have any dependency on it for our decision making.
I saw two important posts this morning – one by Fred Wilson titled Social Proof Is Dangerous and one by Hunter Walk titled The Death of Social Proof. Both are worth reading along with the comments. Naval Ravikant, the co-founder of AngelList, also has a thoughtful comment on Hunter’s post, although I disagree with some of it.
For me, the essence of the conversation comes back to making your own decision as an investor. As an angel investor, I invested in many things and passed on many things. As a VC investor, I invest in a few things and pass on many things. When I look at what drives my decision to invest, it’s the entrepreneurs and the product. It’s never the existing investors, even if I like working with them. When I look at what drives my decision to pass, it’s the entrepreneurs and the product and occasionally the existing investors if I simply don’t want to work with them.
Within Foundry Group, we use a qualitative process to determine whether we are going to invest in something. Once we are actively engaged exploring an investment, all four of us independently interact with the company (although this may happen in groups of us.) To get to this point, it’s going to be a company we likely would invest in. However, we can only invest in about 5% to 10% of the company’s we see that reach this point based on the size of our funds, our tempo, and our deal flow. So we pass on 90% – 95% of companies that “we’d like to invest in, but for some reason don’t get there.”
The reason is almost always qualitative. If the sentiment from one of us trends down during the evaluation process, we immediately pass. This sentiment is driven by our individual interactions with the entrepreneurs and their product. But we each make our own decision, and a single qualitative negative trend causes us to pass. We make mistakes often – there are plenty of companies we pass on that in hindsight we would have liked to be investors in, and in some cases we get a second change and invest in the next round (Fitbit and SEOMoz are two that immediately come to mind.) We always offer to be helpful to the entrepreneurs if they get to this point – some take us up on this. But regardless, we aren’t looking to other investors, or “social proof”, to drive, or even influence our decision making.
This is especially powerful for follow-on rounds. We leave it up to the entrepreneurs whether they want to go find a new investor or not. We express our opinion early in the process and are supportive with whatever the entrepreneur wants to do. If we are going to invest regardless, we’ll make a commitment before the fundraising starts so the entrepreneur knows it is there, even if he isn’t able to attract an outside investor. And, if for some reason we aren’t going to invest, we are clear about it upfront.
I’ve found this interaction to be fascinating with other VCs who are our co-investors. Some are very comfortable with this approach and, as a result, we are attracted to working with them over and over again. Others aren’t, but aren’t offended by our approach, and, since we don’t need them to commit to co-invest along side of us for us to follow through on our commitment, tend to be thoughtful about what they want to do. And some don’t like this approach, although we rarely find this out until we’ve worked with them at least once. When we encounter this kind of situation, we tend not to seek them out as co-investors in the future.
All along the way, we try to be painfully clear with the entrepreneurs that we are making our own decision, independent of the behavior of other investors. This has come from many years of seeing “the investor syndicate” make bad decisions either in the case of a successful company (where they don’t lean in) or an unsuccessful company (where everyone keeps dragging each other forward to “one more round.”) We’ve evolved a deeply held belief that we need to make our own decisions, independent of everyone else, communicate them clearly, and move quickly one way or another.
I’ve tried to scale this personally to my whole life. I don’t really care what other people think – I just try to do my best all the time and learn from everything I do. I describe that as being intrinsically motivated by learning. Sure – I listen to all the feedback I get, but am mostly looking for content, especially content that I can use to improve what I do (and learn from). Praise and validation go in the same bucket as social proof for me – I appreciate it but ignore it.
Are you making your own decisions?